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Letters to Regulators

Proposed Audit Standards Regulation

April 8, 2004

Wayne Cranford
Division Manager
State of Alabama Banking Department
401 Adams Avenue, Suite 680
Montgomery, Alabama 36130

Re: Proposed Audit Standards Regulation

Dear Mr. Cranford:

The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to offer the following comments to the State of Alabama Banking Department regarding the proposed audit standards regulation.

While the revised standards are an improvement over the original proposal, ICBA still has a number of concerns with the proposed audit standards regulation. First, it is inappropriate and unnecessary for the Alabama State Banking Department to issue standards for auditors. For certified public accountants, auditing standards are established by the American Institute of Certified Public Accountants (AICPA) through the AICPA's Auditing Standards Board. Auditors of public companies are now subject to standards issued by the Public Company Accounting Oversight Board (PCAOB). Although the Code of Alabama does state that the superintendent shall by regulation establish minimum standards for audits and reports, we think that the Banking Board could comply with the statute by simply issuing a regulation which says that all audits of financial institutions which are performed by certified public accountants shall comply with such standards as are set by the AICPA. We agree with the statements made by the Deputy Superintendent in his memo to the Superintendent of Banks dated January 22, 2004 in which he says, "it is my belief that we, as a banking department, are not the appropriate body to write detailed audit procedures." Even if the Banking Department attempts to tie the new auditing standards to the generally accepted auditing standards issued by the AICPA, the Banking Department will still have to monitor the AICPA standards and amend its standards as the AICPA amends its standards.

Second, the new auditing standards should be consistent with, and no more restrictive than, federal law, policies and regulation. Section 36 of the Federal Deposit Insurance Act, as implemented by Part 335 of the FDIC's regulations, only requires annual audits by "registered" independent public accountants of financial institutions that have $500 million or more in total assets ("Covered Institutions"). For financial institutions that are not "Covered Institutions" and that are not publicly held, there are no federal requirements for an independent audit committee or for a Code of Ethics. The Alabama banking standards, which require one set of audit standards for all banks and a additional set of standards for banks with more than $250 million in total assets, go far beyond the federal requirements and impose burdensome and costly requirements for community banks and their directors and officers.

Some of our specific comments regarding the proposed standards are as follows:

(1) We think Alabama community banks should be permitted to continue to meet the state auditing requirements by having directors' exams. Many smaller banks cannot afford the expense of having an independent certified public accountant issue an opinion with regard to the bank's financial statements. Furthermore, the new standards should at least be flexible enough to allow for internal control attestation exams where a CPA would only examine management's attestation regarding the bank's internal controls. The 1999 Interagency Policy Statement on External Auditing Programs for Banks and Savings Associations issued by the federal banking agencies allows balance sheet audits and internal control audits as acceptable alternatives to annual audits of the institution's financial statements.

(2) The new regulations do not address the situation of bank holding companies. For example, the requirement that banks with more than $250 million in total assets have independent audit committees does not mention whether a bank holding company with an independent audit committee at the holding company level would satisfy that requirement.

(3) Some of the proposed requirements still look as if Alabama Banking Department is trying to apply the provisions of the Sarbanes-Oxley Act to all banks, regardless of whether that law applies to them. For instance, the requirement for a Code of Ethics in Section II of Part I, the duties for audit committees listed in Section III and the general qualifications of an independent auditor listed in Section V are almost identical to the requirements of the Sarbanes-Oxley Act. Community banks that are not subject to the Sarbanes-Oxley Act should not be made subject to that law by auditing standards issued by a state banking agency.

In summary, while the new audit standards are better than the original proposal, ICBA still thinks it is burdensome for a state banking agency to impose auditing standards that go beyond federal law and regulation. The community banking industry is slowly being crushed by the cumulative weight of costly and complex regulations. There is no reason for the Alabama State Banking Department to add to that burden by issuing auditing standards that will make it more difficult and costly for community banks to obtain an audit. If you have questions or need any additional information, please do not hesitate to contact me at 202-659-8111 or at Chris.Cole@icba.org.


Christopher Cole
Regulatory Counsel

1 ICBA represents the largest constituency of community banks in the nation and is dedicated exclusively to protecting the interests of the community banking industry. We aggregate the power of our members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace.

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